A water bath is a pan of water placed in the oven. To use a water bath you simply fill a large enough pan with water, then place the baking dish, ramkins, etc into the pan of water. The water should reach about half way up the pan. It may be easier to place the baking dish in the empty then add water.
Water baths are used for recipes that require a moist environment and a less aggressive heat for cooking. Cheesecakes, custards and puddings are usually cooked in water baths. Our 4C Casserole is an example of recipe that requires a water bath.